If you do not have an idea about what business credit is, then there is no need to worry. You will be surprised to uncover the fact that most people who are creating new businesses do not also know what it entails, or which advantages it presents. Not forgetting that there is a significant number of new business people who do not know that their business ventures will have a credit score.
Most people create their businesses with the objective of scaling their operations as soon as they have ascertained that their income streams are stable enough. They forget that building their business credit intentionally is equally important. Eventually, you will realize that a business credit rating is as significant as a personal credit rating and that it requires to be impressive at all times. Let us now have a look at what business credit entails.
The definition of Business Credit
Business credit is defined as the record of all a business’ or company’s financial responsibilities. Financial institutions such as lenders and investors used it to decide whether to lend your business any money or to get into any business deal with you. Several agencies are responsible for the calculation of business credit scores. They all utilize different methods, but they will in most cases have a ranking that goes from zero to 100. Essentially, a higher score indicates that you bear a lower risk. Most financial institutions and investors will only look into your needs if your credit score is 80, or anything above that.
How is Business Credit Calculated?
As already stated, different businesses use different approaches to calculate business credit scores. The formulas used, however, take into consideration some unique factors that you should know about so that you stay prepared by ensuring that they are all looking good. Experian, which is a very reputable credit bureau, usually considers the following elements:
1. The number of years your business has been in operation.
2. The number of credit lines you have open.
3. The payment history of your business.
4. The number of times your business has borrowed.
5. The size of your business.
6. The amount of debt that your business has.
Credit bureaus such as Equifax usually assign your business three different scores ( The Motley Fool). They include:
- The payment index score- Equifax collects data from lenders, your trade records and all public records to assess the payment history of your business for the past year. This score ranges from 0 to 100. You should know that late payments contribute to a lower score.
- The credit risk score- This credit bureau usually looks into your business’ credit limits, the size of your company, as well as your credit history to determine the likelihood that the business will fall seriously behind in the making of payments. This score usually ranges from 100 to 992.
- The Business Failure score- Equifax also looks into the likelihood that your business will fail within the next year. In order to determine this score, this credit bureau usually considers the number of years that your oldest financial account has been in existence, the entire history of your late payments, as well as the amount of credit that is available to you that you use. This score ranges from 1000 to 1880.
Why is your business credit score important?
An impressive business credit score will contribute to the growth of your business in many ways. As we highlighted earlier on, most financial institutions and investment groups will mainly look at these scores before approving your loan request or even accepting any form of partnership.
As your business begins to grow, the credit score will be used to determine whether you deserve an extra line of credit. Insurance firms will also rely on this figure to calculate the premiums that you should pay.
The clear indication here is the business credit score can either make or break your company. You should, therefore, strive to protect it by working with experts who look at all aspects of your finances to ensure that you are a viable partner and can get your loans approved. You can also achieve this by separating your personal credit from business credit, more so if you own a small business.
How can you build your credit score?
If you are getting started with your business and would want to ensure that sail smoothly as far as business credit and its benefits are concerned, then it is a good idea to work with a credit agency or crediful.com in order to set things right from the word go.
You can have a free business credit report sent to you instantly. If you happen to have a bad business credit score, then you can access a Credit Repair guide, right before fixing the factors that contribute to the score.
Some of the other ways that you can build your business credit score include:
- Keeping your business information with Equifax and Experian (or any other credit bureau that you know of and trust).
- Build a strong work relationship with all your suppliers, and ask them to report your impressive payment streaks to any credit bureau.
- Ensure that your records are clean by avoiding any negative remarks from the external environment (such as court rulings and bankruptcies) NerdWallet.
- Always pay your creditors on time.
There you have it! Business credit 101. I hope that you have picked out the basics that you need to know about this concept, and that you will put it to use in order to boost the growth of your business.